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CHAPTER 1

Economics is a socialscience that is concerned with how individuals and societies


choose to use scarce resources to produce, distribute and consume goods and
services. The demand for goods and services frequently exceeds the supply, and
how these scrace resources are allocated is the main interest of economics.
The study of economics can be broken into two main categories : macroeconomics
and microeconomics. Macroeconomics is the study of the national economy and its
various segments, such as national income, output, employment and growth.
Microeconomics is concerned with the individual units within the general economy,
such as business firms and households.
Real estate is defined as land, that which is affixed to the land, that which is
appurtenant to the land, and that which is immovable by law. The ownership of real
estate carries certain rights, known as the bundle of rights
Real estate economics is about people and how their actions affect real estate
values. A formal definition woud be ; real estate economics is a study that uses
economics principles, both macro and micro, to analyze the impact that national,
regional, community, and neighborhood trends have on real estate values
Real estate economics helps people understand what causes flucturations in real
estate activity and how these changes can affect local real estate markets
Real estate decisions made today will be reflected in real estate values in the cities
and neighborhoods of tomorrow: a course in real estate economics aids people in
understanding what impact todays real estate cations will have on future real
estate values
This textbook is divinded into four parts, starting with general economic principles
and moving on to applied real estate economics. Part one , basic economic
background for real estate analysis, contains five chapters, which review the major
principles of economics and discuss why these principles are important to real
estate students
Part one explores the role of government and foeign interests in the economy,
devotes a chapter to monetary policy, and discusses the economic characteristics of
real estate markets
Part two, understanding real estate markets, devotes six chapters to regional,
community and neighborhood real estate analysis. The objective is to discuss why
local and regional economics change and how these changes are reflected in the
real estate market

Part three, major influences on real estate development, presents one chapter on
each of four topics: real property taxation, land use controls, real estate
developments procedures, and required government report
In past four, real estate investment : the economics of the parcel, four chapters
bring together all the material previously presented in order to demonstrate how
the principles of real estate economics can be used to analyze a specific property

CHAPTER 2
The study of real estate economics can be approached from the mathematical view,
called econometrics or from the nonmathematical perspective , using verbal
descriptions. Econometrics combines economics, mathematics , and statistics to
express economic relationships in terms of mathematical equatios. The verbal
approach uses words rather than equations to describe economic relationships.
According to economists, there are four essential resources, called factors of
production, that are needed to produce goods and services ; land, labor, capital and
entrepreneurship
Factors of Production
1.

Land refers to all natural resources trees, minerals, and water as well as the
surface of the earth
2. Labor is the human effort needed to transformraw materials into finished
products or to perform services
3. Capital is any manufactured instrument used to increase production, such as
machinery, tools, and buildings
4. Enterepreneurship is the assembling of the other factors of production in a
systematic manner to produce goods or services
Rent, Wages, Interest, Profit and Income
In a capitalistic economy, private individuals own the factors of production, and they
insist upon payment for the use of their property
Rents, wages, interest, and profits constitute income. If you are like most people,
you spend a major portion of our income buying goods and services
The Circular Flow of the Economy
The outer dotted lines show the flow of income. As you see, the individual is both
buyer and seller. He or she sells land, labor, or capital in the resource market and
buys goods and services in the product market. Businesses buy land, labor, and
capital in the resoaurce market and sell goods and services in the product market.

A market is defined as a place where buyers and sellers meet to bargain and
exchange items of value at negotiated prices
The characteristics of a market can influence the level of output and the prices paid
for goods and services. Markets can be broken down into two board categories :
markets with perfect competition and markets with imperfect competition
When conditions of perfect competition prevail in a market, there are many buyers
and sellers bidding against each other for available goods and services. No one
buyer or seller can exert influence over the market or control prices. The goods or
services being offered are similar enough so that the buyer will select the lowestpriced offering. The bargaining between buyers and sellers established prices.
Prices in a market economy are determined by the interaction of buyers and sellers
as they compete against one another for goods and services In the marketplace.
The total quantity that buyers are willing to buy at a given time at certain prices is
called demand. The total quantity that sellers are willing to sell at a given time at
certain prices is called supply
People must be carefull not to confuse desire oe need with demand. Demand is
desire or need coupled with the ability and the willingness to spend
As stated earlier, economists do tend to agree on some things. One of these
common points is the existence of a few economic laws. An important law is the law
of demand, which states : the lower the price, the more consumers will buy. The
higher the price, the less they will buy
Some of the causes of a change or shift in demand are listed below:
1. A increase or decrease in population. Demand rises or falls with population :
as the number of people increases, demand increase ; as the number of
people declines, demand declines.
2. An increase or decrease in per capita income. Demand also rises and falls
with the level of per capita income : the higher the level of income, the
greater the demand; the lower the level of income, the smaller the demand
3. Changes in consumer taste and substitute products
4. The amount of credit available
5. The effect of advertising
Supply, like demand, reflects changing circumstances. Some of the causes of a
change or shift in suppy are:
1. Changes in the cost of the factors of production
2. A change in demand for one product can cause a change in supply of another
product
3. Business anticipation of future prices and profits can change the amount of
goods supplied

International Trade Concepts


1. Free Trade : Restrictions, quotas, and tariffs are removed, and all goods and
services can flow between countries without restriction in an open
competitive market
2. Principle of comparative advantage : assuming free trade , this principle
states that the entire worlds standard of living will be increased if each
nation specializes in producing those goods and services for which it has the
lowest comparative cost
3. Balance of payments : a record of all transactions of the citizens of one nation
with another or with all other countries
4. Balance of trade : a record of the merchandise (goods, not services)
transferred between one nation and another or all other nations
5. Rate of exchange : the rate or price at which the currency of one nation can
be converted into the currency of another
International trade between countries has an Important impact on domestic
economies. The flow of imports and exports can directly affect domestic incomes
and prices
Many people think that a nation is better off economically if it can become selfsufficient by producing all of its own goods and services. However, economic theory
states that a nation that attempts to become self-sufficient will do so at a higher
cost to its citizens than if the nation had entered into free-trade agreements with
other nations,
The theory of free trade makes economic sense, but political and other forces within
nations tend to restrict international trade in an effort to protect special interest
groups. Here are two exampkes : (1) the oil-producing export countries (OPEC) form
cartels to regulate the production of oil and prices, and (2) the United states
establishes tariffs and quotas to protect some domestic industries feom foreign
competition.
Economics is a social that examines how people use and allocate scarce resources.
There are several ways of solving the problems of what will be produced, how it will
be produced, and for whom it will be produced. A capitalistic economy leaves the
decisions to private individuals operating in competitive markets
All economies need four elements, known collectively as the factors of production,
in order to produce goods and services : land, albor, capital and entrepreneurship.
In a capitalistic economy, these factors are privately owned and must be paid for in
order to be used. The payment for land is called rent, for labor it is called wages, for
capital it is called interest, and for entrepreneurship it is called profit. When rent,
wages, interest, and profits are received, they called income. Income is earned by
individuals when they sell the factors of production. The reaned income is then

spent to purchase goods and services produced by these same factors of


production.
The prices paid in a competitive economy are determined in markets through the
interaction of supply and demand. Demand is the total quantity that buyers are
willing to purchase at a given set of prices, in a particular market, at a particular
time. The law of demand states that the lower the price, the more consumers will
buy ; the higher the price, the less they will buy
Supply is the total quantity that sellers are willing to sell in a particular market, at a
particular time, at given prices. The law of supply states that producers will offer
more products for sale as prices increase and fewer as prices decrease. The law of
supply is based on the provit motive.
It is the interaction of supply and demand that determines the prices paid and the
quantity produced in a competitive economy.

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